Encyclopedia of business and finance vol 2

ENCYCLOPEDIA OF

BUSINE$$
FINANCE
AND


Editorial Board
EDITOR-IN-CHIEF
Burton S. Kaliski
New Hampshire College
ASSOCIATE EDITORS
Roger Luft
Eastern Illinois University
Dorothy Maxwell
Sacopee Valley High School
Jim Maxwell
San Jose State University (retired)
Mary Ellen Oliverio
Pace University
Allen Truell
Ball State University

ii


ENCYCLOPEDIA OF

BUSINE$$
FINANCE
AND

VOLUME 2

BURTON S. KALISKI,
Editor-in-Chief


Encyclopedia of Business and Finance
Copyright © 2001 Macmillan Reference USA
All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system,
without permission in writing from the Publisher.
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Macmillan Reference USA
An imprint of the Gale Group
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New York, NY 10019

Library of Congress Catalog Card No.: 00-107932

Printing number
1 2 3 4 5 6 7 8 9 10

ISBN 0-02-865065-4 (set).—ISBN 0-02-865066-2 (v. 1).—ISBN 0-02-865067-0 (v. 2)

Printed in the United States of America by the Gale Group
Gale Group and Design is a trademark used herein under license.

I
IDEA SELLING
(SEE: Advertising)

IMPORTS
(SEE: International Trade)

IMPULSE ITEMS
(SEE: Shopping)

INCOME
By working and being productive, households
earn an income and businesses make a profit.
The total amount that households and businesses receive before taxes and other expenses
are deducted is called aggregate income. The
amount of money that is left after taxes and
other expenses have been deducted from one’s
pay is called disposable income. Discretionary
income is what consumers (households) have
to pay for the goods and services they desire.
We shall focus only on households and how
they consume their income. Households spend
most of their discretionary income on consumption. Some consumers spend even more
than their current discretionary income on consumption by borrowing. Consumption consists
of almost everything that consumers purchase,

from durable to nondurable goods as well as all
types of services. The only exception to this rule

is the purchase of a new home: It is counted as
an investment because homes tend to appreciate in value.
Households (individuals) cannot spend all
their earnings on consumer goods and services.
Part of the income each household receives
must be used to pay different kinds of taxes,
such as income taxes to federal, state, and local
governments. Most state and local governments
also impose sales taxes. In addition to paying
income and sales taxes, households may also
have to pay property taxes to local governments. After paying taxes and spending income
on consumables, some households put aside
money as savings to be used for consumption
at a later time.
Earnings differ among individuals and
households because of several factors: (1) inborn
differences, (2) human-capital differences, (3)
work and job performance, (4) discrimination,
(5) age, (6) labor mobility, (7) government programs and policies, and (8) luck.
Inborn differences are those characteristics
that one is blessed with, such as strength,
energy, stamina, mental capacity, natural
ability, and motivation.
Human-capital differences reflect how people invest various amounts of both their
physical and mental capacities toward the
achievement of specific goals.

451

INCOME

The Circular Flow of Money

(3 )

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Figure 1
SOURCE:

Federal Reserve Bank of St. Louis, Missouri, Council on Economic Education. The Money Tree. University of Missouri-St. Louis:
June 1989.

Work and job performance indicates how
individuals differ in their preferences
regarding the trade-off between work and
leisure. Those who wish to work more
usually receive a higher income; others
prefer more leisure at the cost of earning
a lower income. People also prefer
different types of jobs. These specific job
choices will affect the distribution of
income.

452

gain experience and their productivity increases.
Labor mobility—the willingness to go
where the jobs are or to move wherever
the company has a need—enhances an individual’s income potential. Immobility
limits workers’ response to changes in

wage rates and can contribute to an unequal distribution of income.

Discrimination is treating people differently
solely on the basis of factors unrelated to
productivity.

Government policies and programs, such as
benefit programs and the progressive income tax, reduce income inequality. The
minimum wage may also increase income
inequality.

Age affects earnings significantly. Most individuals earn little before the age of eighteen. Earnings tend to increase as workers

Luck plays a role in determining the distribution of income, but choices are perhaps
the most important factor.

ENCYCLOPEDIA OF BUSINESS AND FINANCE


INCOME TAX, HISTORY OF

BIBLIOGRAPHY

Mings, Turley. (2000). The Study of Economics: Principles,
Concepts, and Applications, 6th ed. Guilford, CT:
Dushkin Publishing Group.

GREGORY P. VALENTINE

INCOME TAX, HISTORY OF

A tax consists of a rate and a base. Because
income is the base for the income tax, a central
question is: What constitutes income? Different
theoretical concepts of income exist in economics, accounting, and taxation. The base of income
to which the federal income tax rate structure
applies is taxable income as constitutionally and
statutorily defined. Thus, the concept of taxable
income is grounded in theory and modified by
political dynamics and administrative concerns.
From its modern introduction in 1913, the
rate structure for the individual income tax has
been progressive, meaning that tax rates graduate
upward as the base of taxable income increases.
Different tax rates apply to ranges of income,
called brackets. Over time, the number of
brackets and tax rates that apply to them have
varied greatly. The tax rate applied to the last
dollar of taxable income earned by a taxpayer is
called the marginal tax rate. Total income tax as a
percentage of total taxable income is the average
tax rate, whereas total income tax as a percentage
of total economic income is the effective tax rate.
ADOPTION AND EARLY IMPLEMENTATION
OF FEDERAL INCOME TAX

Until the Civil War, federal revenues came from
relatively low tariff rates imposed on a broad base
of imported goods and from excise taxes. However, tariffs and excise taxes could not support
escalations in government spending caused by
the Civil War. Drawing on the example of the

British Parliament’s adoption of an income tax in
1799 to help finance the Napoleonic Wars, the
U.S. Congress adopted the first federal income
tax in 1861 to partially finance the Civil War.
Legislators regarded the war-motivated income
tax as an indirect tax because neither real nor

ENCYCLOPEDIA OF BUSINESS AND FINANCE

A tax collector in his office.

personal properties were taxed directly. The constitutionality of the tax was not challenged, and it
expired in 1872.
During the post-Civil War years, high tariffs,
often established to protect selected industries
from foreign competition, and excise taxes were
the major sources of revenues. By the early 1890s,
tax structure was a political issue, with debate
centering on the equity of the tax burden. In

453


INCOME TAX, HISTORY OF

1894, with strong Democratic support, a modest
income tax was adopted. The first $4000 of income was exempt from taxation, and the initial
tax rate was 2 percent. The prevailing view was
that this tax would apply to high-income taxpayers and corporations without extending to the
wages and salaries of working people.

In 1895, the U.S. Supreme Court declared the
income tax unconstitutional in the case of Pollock
v. Farmers’ Loan and Trust Co. on the basis that it
was a direct tax. Article I, Section 9 of the original
U.S. Constitution provided that ‘‘No capitation,
or other direct tax shall be laid, unless in proportion to the census.’’ After the income tax was
declared unconstitutional, Democrats began to
introduce constitutional amendments to permit
it. By the early 1900s, political support had
broadened to include progressive Republicans.
The Sixteenth Amendment, which legalized an
income tax, was submitted to the states in 1909
and ratified in 1913. At this time, roughly 2 percent of American households paid the new tax.
MODIFICATIONS TO FEDERAL INCOME
TAX OVER TIME

Various aspects of the federal income tax have
changed since its inception.
World War I and Depression Years. During
World War I, the Democrats altered the tax by
adopting highly progressive rates and structuring
the base to consist of the incomes of corporations
and upper-income individuals. Additionally, an
excess profits tax was imposed. This was a progressive tax on above-normal profits, and it generated most of the new tax revenue raised during
World War I. Together the income tax and excess
profits tax became an explicit means for the redistribution of income. To administer these
taxes, the Bureau of Internal Revenue reorganized along functional lines, expanded in size,
and employed such experts as accountants, lawyers, and economists. In 1916, ‘‘reporting at the
source’’ was adopted, which required corporations to report salaries, dividends, and wages to
the Treasury Department.

454

When the Republicans took control of the
presidency and Congress in 1921, taxes on corporations and upper-income taxpayers were reduced, the excess profits tax was repealed, and
the tax rate structure was adjusted to be less progressive. Many preferences were incorporated
into tax law in the form of deductions, and the
preferential taxation of capital gains was adopted.
A capital gain is a gain that results from the sale
of a capital asset, such as shares of stock in a
corporation. In 1932 under President Hoover
and in 1935 and 1937 under President Roosevelt,
tax rates increased and the tax base expanded.
However, the income tax was not a dominant
policy focus during the 1930s, partially because
the federal government relied heavily on excise
taxes and debt to obtain funds to support government activities.
World War II. The most significant impact of
World War II on the individual income tax was
to transform it to a mass tax that was broadly
based and progressive. In 1941, changes were
made to both rates and base. Higher tax rates
were adopted and lower exemptions were allowed, thus expanding the base. Higher tax rates
were adopted again in 1942. With the inclusion
of a surtax, tax rates ranged from 13 percent on
the first $2000 of taxable income to 82 percent on
taxable income in excess of $200,000. The number of taxpayers increased from 3.9 million in
1939 to 42.6 million in 1945. At the end of the
war, 60 percent of households paid the income
tax. The efficiency of collection was enhanced by

the adoption of payroll withholding in 1943. By
1944, the individual income tax generated about
40 percent of federal revenues.
For corporations, progressive tax rates, also
called graduated tax rates, were introduced in
1935, repealed in 1938, and remained flat during
World War II. However, wartime corporations
were subject to a graduated tax on excess profits,
with the maximum rate of 50 percent after an
allowance for a substantial credit.
During the World War II years, there was a
major shift in the taxing power of the federal
government relative to state and local governments. Federal revenues, as a percent of total

ENCYCLOPEDIA OF BUSINESS AND FINANCE


INCOME TAX, HISTORY OF

taxes collected by all levels of government, increased from 16 percent in 1940 to 51 percent in
1950.
With some modifications, the basic structure
of the income tax remained in place during the
post-World War II years and continues to the
present. Individual tax rates were reduced from
wartime highs, and the tax base began to narrow
with the adoption of exemptions, deductions,
and credits. Inflation in the 1960s and 1970s created a condition called ‘‘bracket creep.’’ Taxpayers whose monetary incomes were increasing
because of inflation, but with no equivalent increase in purchasing power, were pushed into
higher tax brackets and thus subject to higher

marginal tax rates. Because the corporate rate
structure was not progressive, bracket creep did
not apply to corporations. Although the corporate and individual income taxes had generated
roughly the same revenue in 1950, by 1980, partially as a result of bracket creep, the individual
income tax generated four times the revenue of
the corporate tax.
After World War II. During the post-World
War II years, the tax system was used increasingly
as a means of financing. A government may deliver services by direct payment or indirectly by
subsidy through a reduction in tax. For example,
the deduction for home mortgage interest provides a tax subsidy for investing in housing. The
term tax expenditure is used to describe subsidies
for various purposes achieved by use of exemptions, deductions, and credits. Exempt income is
not subject to tax. A deduction reduces the
amount of income that is subject to tax, and a
credit represents a direct reduction in the
amount of tax liability. From 1967 to 1982, tax
expenditure increased from 38 percent to 73.5
percent of tax receipts. Tax expenditure provisions complicate the determination of taxable income, the base for the income tax.
The sophisticated study of tax policy, which
continues to the present, began on a widespread
basis during the post-World War II period. Central questions concerned the impact of tax policy
on the amount of investment, the movement of
capital, and labor-force participation.

ENCYCLOPEDIA OF BUSINESS AND FINANCE

From 1980 until 2000. The 1980s began with
the adoption of the Economic Recovery Tax Act
(ERTA) during President Reagan’s term. A key

provision of this act was the indexing of tax rates
for inflation to eliminate bracket creep. ERTA
provided for significant reductions in tax rates
and began to reduce the role of the income tax in
the nation’s revenue system. During the 1980s,
interest in tax reform grew, culminating in passage of the Tax Reform Act of 1986. The goal of
this act was to be revenue-neutral, neither increasing nor decreasing revenues. It provided for
a reduction in tax rates by expanding the tax base
through the elimination of some tax expenditures.
After passage of the 1986 Tax Reform Act,
attention shifted to the taxation of capital gains
and replacement of the income tax. Beginning in
1987, capital gains and ordinary income were
taxed in the same manner. Then preferential
treatment was reintroduced for capital gains.
Commonly proposed alternatives to the income
tax include the value-added tax and national sales
taxes, two taxes for which the tax base would be
consumption rather than income. Another alternative is the flat tax on income. In theory, with
one single tax rate—a flat tax—all taxpayers
would pay the same proportion of taxable income in taxes. If the base of taxable income were
defined as earned income, taxpayers receiving
only interest and dividends would be excluded
from the payment of taxes. Currently interest and
dividends are subject to a double tax. Corporations pay income tax on the earnings from which
dividends and interest are paid, and individuals
pay income tax on dividend and interest income
that they receive. Most flat tax proposals eliminate double taxation.
ADMINISTRATION OF FEDERAL
INCOME TAX

The Internal Revenue Service (IRS), which administers the income tax, is part of the U.S.
Department of Treasury. Adapting to changes in
technology to achieve the most efficient processing of information is a major challenge for the
IRS. For many years the IRS was organized on a

455


INDEPENDENCE STANDARDS BOARD

geographical basis, but in 1998 it was reorganized
into four functional divisions differentiated by
type of taxpayer.
For corporate and individual taxpayers that
report on a calendar-year basis, annual tax returns are due on or before March 15 and April
15, respectively, following the close of the calendar year. Providing that the tax due is paid, time
extensions for filing returns may be obtained.
Although the closing dates for the quarters differ,
both individuals and corporations are subject to
the payment of estimated tax in quarterly installments. Taxpayers who fail to file tax returns or
fail to pay taxes are subject to monetary penalties,
fines, and possibly prison sentences.
EXTENSION OF INCOME TAX TO THE
STATE LEVEL

Wisconsin was the first state to adopt an income
tax—in 1911. Massachusetts and New York soon
followed by adopting income taxes when faced
with problems related to World War I. Most

other states adopted the income tax as a response
to revenue crises created by the Great Depression. At the state level, definitions of taxable income differ from the federal definition and differ
among states. Exemptions, deductions, and rates
of taxation vary among states. As of January
2000, Nevada, South Dakota, Washington, and
Wyoming did not impose individual or corporate
income taxes; Alaska, Florida, New Hampshire,
and Texas did not impose an individual income
tax; and Michigan did not impose a corporate
income tax. Formulas are used to allocate the
income of multistate corporations among the
states in which they operate.
(SEE ALSO: Taxation)
BIBLIOGRAPHY

Brownlee, W. Elliot. (1996). Federal Taxation in America.
New York: Cambridge University Press.
Witte, John F. (1985). The Politics and Development of the
Federal Income Tax. Madison: University of Wisconsin
Press.

JEAN E. HARRIS

456

INDEPENDENCE STANDARDS
BOARD
The Independence Standards Board (ISB) was
established in May 1997 as a result of discussions
between the American Institute of Certified Public Accountants (AICPA) and the U.S. Securities

and Exchange Commission (SEC). The various
securities laws enacted by Congress and administered by the SEC recognize that the integrity and
credibility of the financial reporting process for
public companies depends, in large part, on auditors remaining independent from their audit clients. The operating policies of the ISB are designed to permit timely, thorough, and open
study of issues involving auditor independence
and to encourage broad public participation in
the process of establishing and improving independence standards. The mission of the ISB is to
establish independence standards applicable to
audits of public entities in order to serve the
public interest and to protect and promote investors’ confidence in the securities markets.
ISB STRUCTURE

The ISB is a board of eight members, supported
by an Independence Issues Committee, an executive director, and other support staff. The ISB
operates as an independent body, funded by the
AICPA SEC Practice Section of its Division of
CPA Firms (SECPS). Accordingly, the ISB has
authority to make public statements on matters
relating to the subject of auditor independence in
connection with audits of public entities without
clearance from the SECPS or the AICPA board of
directors. ISB board members serve on a parttime basis. Four are public members, three are
senior partners of SECPS member firms, and one
is the president of the AICPA or the president’s
designee. Public members are supposed to be
prominent individuals of high integrity and reputation who understand the importance of investor protection, the U.S. capital markets, and the
accounting profession. The appointment of the
initial board was made by the SECPS Executive
Committee after consultation with the SEC and
the president of the AICPA. The terms of the

ENCYCLOPEDIA OF BUSINESS AND FINANCE


INDEPENDENCE STANDARDS BOARD

board members are staggered and may be of varied lengths. Following the appointment of the
initial board, successor public members will be
nominated for three-year terms by the existing
public members of the board. New members
from SECPS member firms will be nominated for
three-year terms by the SECPS Executive Committee subject to the approval of the AICPA’s
board of directors. The entire board will elect
replacement members from those slates of nominees. The board selects its own chairperson from
among the four public members.
ROLE OF CHAIR

The chair of the ISB serves a three-year term. The
chair has powers and responsibilities relating to
the appointment and supervision of personnel at
the ISB, the distribution of work among such
personnel, and the use and expenditure of funds
by the ISB within the budget constraints approved by the ISB. The chair also has the authority to establish and appoint persons to task forces
following approval by the ISB and after consultation with the executive director and others. The
chair provides the leadership in identifying the
pronouncements the ISB will issue, including, if
necessary and appropriate, the authority, hierarchy, and exposure process for each pronouncement. All proposed standards will be exposed for
public comment for a minimum of thirty days.
ISB STAFF

The ISB has a full-time executive director and, as
necessary or appropriate, other full-time professional and administrative staff. The ISB staff
fields telephone and other inquiries concerning
independence issues in the manner that the
board directs and pursuant to policies established
by the board. In responding to inquiries, the ISB
staff provides informal interpretations or guidance to the inquiring parties. As appropriate, the
ISB staff informs the board regarding issues
raised in such inquiries that might benefit from
more comprehensive consideration by the board
and, to the extent delegated or assigned by the
board, the Independence Issues Committee
(IIC). The ISB and its staff address independence

ENCYCLOPEDIA OF BUSINESS AND FINANCE

inquiries that arise, and the ISB understands that
the SEC will encourage registrants and auditors
to look to the ISB and its staff to address such
matters. Further, the ISB understands that the
SEC staff expects to refer specific independencerelated issues that may arise to the ISB. Absent
express ratification by the board, ISB staff interpretations will be considered as applying only to
the particular parties directly affected by the interpretation, who may rely on such interpretation. The executive director advises and consults
with the AICPA, including its Professional Ethics
Executive Committee, as appropriate, on independence issues of interest to the AICPA. A public file on all ISB meetings is kept for public
reference and inspection for a reasonable period
of time consistent with the public interest in the
AICPA library.
THE INDEPENDENCE ISSUES COMMITTEE

The Independence Issues Committee (IIC) assists
the ISB in establishing independence standards
through the timely identification and discussion
of emerging independence issues within the
framework of existing authoritative literature.
The IIC also addresses broader interpretative issues, including those that emerge from inquiries
fielded by the ISB staff, and communicates its
consensus on such issues to the board. The IIC
makes publicly available its consensuses and the
rationales or bases for such conclusions.
The IIC is comprised of nine certified public
accountants (CPAs), drawn from SECPS member firms that audit SEC registrants, who are
knowledgeable about the existing independence
literature and are in positions to be aware of
emerging practice issues as they develop. The
SECPS Executive Committee nominates the nine
members of the IIC, in consultation with and
subject to the approval of the ISB. The ISB specifies the terms of the IIC members. The ISB names
the chair from the nine members of the IIC.
The meetings of the IIC are usually open to
the public, but sessions or portions of sessions
may be closed to the public if they deal with (1)
administrative matters, (2) matters that may
cause substantial harm or injury (a rare occur-

457


INFLATION

rence), or (3) matters involving or relating to
advice of counsel; all such closed sessions must be
authorized by the chair or his or her designee,
and in no instance can the SEC staff be excluded
from these sessions. For the IIC to reach a consensus, at least six IIC members must approve the
judgment or determination and no more than
two IIC members may oppose it. On reaching a
consensus, the IIC will promptly forward the
matter to the ISB for ratification. If a majority of
the ISB ratifies the consensus, the ISB understands that the SEC will consider such consensus
as having substantial authoritative support.
PUBLIC HEARINGS

The ISB may seek information about independence matters by holding a public hearing. The
basis for a public hearing generally will be an
exposure draft, although the ISB may also determine to hold a public hearing for any other
purpose. Each public hearing will be conducted
by one or more members of the ISB or IIC, the
executive director, or technical staff pursuant to
procedures approved by the ISB for such hearing.
The ISB will publicly announce its intent to hold
a public hearing at least sixty days prior to the
hearing, unless a shorter period (but in no event
less than thirty days) is considered appropriate by
the ISB, in any manner reasonably designed to
inform the public.
Any individual or organization may request
to be heard at a public hearing, and, to the extent
practicable, the ISB will attempt to schedule all
those making timely requests. Submission of

written comments, a position paper, or an outline of a proposed oral presentation will generally
be a condition of being heard. Materials submitted to the ISB in this connection will constitute a part of its public file.
More information is available from Independence Standards Board, 6th floor, 1211 Avenue
of the Americas, New York, NY 10036-8775;
(212)596-6133 (telephone); (212)596-6137 (fax);
or .

458

(SEE ALSO: American Institute of Certified Public Accountants; Auditing; Securities and Exchange Commission)
C. RICHARD BAKER

INFLATION
(SEE: Economic Cycles)

INFLUENCE
(SEE: Management: Authority and Responsibility)

INFORMATION PROCESSING
Information processing may be defined as the
manipulation of data to produce useful information. Over the past several years, the explosion of
sophisticated computer software has dramatically
changed the way computer users create documents. When word-processing, spreadsheet, and
database software packages first became available
to the public in the late 1970s and early 1980s,
they were very different. The user interface,
menus, and procedures were quite different depending on the program. As the years passed and
computer software became more sophisticated,
the software programs began to share many common features. Today, computer software not
only shares common features, it is extremely

compatible—that is, information created in one
software package can be shared with that of another.
In today’s modern office, computer documents often require that a combination of software packages be used together. For example, it
might be necessary to place a spreadsheet in a
word-processing document or a spreadsheet
graph on one of the slides in a presentation file.
This ability to integrate software applications is
one of the most useful features of using Microsoft
Windows and other software designed to be used
in the Windows environment.
Integration simply means the sharing of information among applications. Windows allows

ENCYCLOPEDIA OF BUSINESS AND FINANCE


INFORMATION PROCESSING

the user to use different software packages as if
they were parts of a single program. Shelley,
Cashman, and Vermaat (2000) explain that integrating these software programs allows the user
to move quickly among applications and transfer
text and graphics easily. The Windows environment offers three ways that information can be
integrated: (1) the clipboard, (2) linking objects,
and (3) embedding objects.
THE CLIPBOARD—COPYING, CUTTING,
AND PASTING

Software running in the Windows environment
makes it very easy to copy and move text from
one software application to another. The user can

copy or move text, graphics, or other objects
from one place to another using the clipboard
application. For example, a chart created in Excel
could be copied and pasted into a written report
created in Word. To complete this procedure
successfully, the user must first select the desired
text or object. Then the user may choose to copy
or cut (move) the selected text from the edit
menu. Shortcuts usually exist for these two commands, such as clicking a button on the toolbar.
If the user copies the selected text, an exact copy
of the original text will be placed on the
clipboard. If the user cuts the text, however, the
original text will be moved to the clipboard. Text
that is placed on the clipboard will stay there
until it is pasted somewhere else. To paste the
information, the user selects the paste option
from the edit menu. It is important to remember
that only one object can be stored on the
clipboard at a time. When a new object is copied
or cut to the clipboard, whatever information
was previously there will be removed.
Because multiple software programs (applications) can run at the same time in Windows,
the user can place information on the clipboard,
open another program, and paste the information in the desired location in the new program.
This method is the simplest and most frequently
used for sharing information among software
applications.
Copying/cutting and pasting among different
applications has several advantages. This proce-

ENCYCLOPEDIA OF BUSINESS AND FINANCE

dure saves time, eliminates keying errors, and
allows the user to tie various applications together as if they were part of a single program.
LINKING INFORMATION
BETWEEN PROGRAMS

Some limitations exist in using the clipboard to
copy and move information between applications. Once the information has been pasted
from the clipboard to the new location, all ties
between the original source document and the
pasted information cease to exist. The destination
document, which contains the pasted information, will not be automatically updated if any
changes are made to the original source document. This limitation creates a problem in many
of today’s fast-paced work environments. For example, many annual reports created in wordprocessing packages contain financial status information that is produced in a spreadsheet
package. If the financial data are changed or updated in any way, the information that was previously pasted into the actual word-processing report would not show those changes.
To rectify many of these situations, Windows
has developed Object Linking and Embedding
(OLE). The first OLE method, linking, allows the
user to share information among applications by
creating a connection (or link) between the original source document and the destination document. If the source is altered after an OLE has
been established, the destination document will
automatically update and show all the changes
that have been made. When data are linked between two documents in this way, the data are
not actually stored in a destination file. The destination document stores only the information it
needs to link back to the original source document. If changes need to be made to the linked
information, the changes must be made and
saved in the original source application.
Linking is very useful when there is a large
group of users who need to view the source data.

These users can access the source data and then
view the updates if changes are made frequently.
To link a selected object that has already been
copied to the clipboard, the user must choose the

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INFORMATION PROCESSING

Paste special option on the edit menu. Within
this menu, the user selects the Paste link option.
The user may find several advantages by deciding to link objects. Linking does not waste the
computer’s memory or storage space because it
never duplicates information in two separate locations. Linking allows the user to place objects
such as those created in other applications or
sound and video clips into word-processing,
spreadsheet, and presentation documents that
have no other options for performing such procedures.
Linking can also be very beneficial when different users have to share computing tasks. For
example, the accounting department might be
responsible for the creation of all spreadsheets
and graphs within a company. If the accounting
department saves the files on the network drive,
employees throughout the company can link
these spreadsheet and graph files into their necessary applications. If changes need to be made to
the original spreadsheet files, the accounting department would be responsible for making these
updates. When other users throughout the company open their destination documents that contain the link, the changes can either be automatically updated (called an automatic link) or can be
updated when the user requests it (called a manual link). Most Windows software has an Update
Now feature that allows a user to decide when to

update a link. A lock feature is also widely available in case the user does not want the link to be
accidentally updated.
One important point to remember when
linking information is that the destination document must always be able to locate the original
source document. If a destination file was copied
to a floppy disk and taken to another computer,
all linked files must also be copied onto the
floppy disk in order for the links to be able to find
their connections.
EMBEDDING OBJECTS

The second type of OLE process, embedding, is
another feature of Windows. When information
from one application is embedded into another,
the information becomes part of the destination

460

file. Although this process requires the use of
more memory, it allows the destination file to be
self-supporting. When the embedded object
needs to be edited or updated, the user must
double-click on the object. This double-clicking
opens the source application file inside an editing
window. All the necessary menus and features
will be available in this window for use in editing
the source information. After making the appropriate changes to the embedded object, the user
simply clicks outside of the editing window and
returns to the destination document. Because the
user does not have to keep opening and closing

the source application file, a great deal of time is
saved. Another advantage of this feature is that
the user can make changes in the embedded
object and the destination file without touching
the original source document and vice versa. In
keeping with linking objects, the user must be
able to access all source applications in order to
make changes in any embedded objects. The user
does not, however, need to have access to the
original source application in order to print or
view the destination document. To embed an
object, the user follows the same procedures as
for linking an object except that in the Paste
special menu the Paste option is selected instead
of the Paste Link option.
O’Leary and O’Leary (1996) explain that embedding text or objects is often favored over linking objects in the following situations: (1) The
size of the file is not important; (2) users have
access to source applications, but not the original
source file; and (3) the embedded data is changed
only occasionally. For example, if the user intends to use the shared information at a location
removed from the source file, it would be necessary to embed the object in order to edit the
information. When linking, however, the user
must always have access to the source file via a
network or an accessible fixed drive.
Unfortunately, not every software program
supports OLE features. If a software package supports OLE features, it is called OLE-aware. The
first version of OLE was introduced with Windows 3.x; therefore, nearly all software created to

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INFORMATION PROCESSING: AN HISTORICAL PERSPECTIVE

run under the Windows environment is OLEaware.
CONCLUSION

Information processing is a broad concept covering the many aspects of manipulating data to
produce useful information. This article has addressed the specific skills of integrating information by using the clipboard, linked objects, and
embedded objects. With the increased sophistication of software packages, the concepts and skills
used in copying/cutting and pasting to the
clipboard, linking objects, and embedding objects are no longer difficult to use. Software integration allows a number of software application
packages to be used as if they were a single package, thereby increasing efficiency and productivity within the work environment. Various departments within an organization are able to
access files from any desktop and link them to
necessary applications. Users are able to save time
and eliminate keying errors. As these activities
become more commonplace, it may be necessary
for computer users within organizations to update their skills in these areas.
BIBLIOGRAPHY

O’Leary, Timothy J., and O’Leary, Linda I. (1996). Microsoft
Office Integration. New York: McGraw-Hill.
Shelly, G. B., Cashman, T. J., and Vermaat, M. E. (2000).
Microsoft Office 2000: Introductory Concepts and Techniques. Cambridge, MA: Course Technology.

J. D. THOMERSON
DONNIE MCGAHEE
MARY ALICE GRIFFIN

INFORMATION PROCESSING:
AN HISTORICAL PERSPECTIVE

Throughout history humanity has tried to invent
new ways to simplify the problem-solving process. With each generation, people have used various tools and methods to help them process
information. Information is defined as letters,
symbols, or numbers that are used to express an
idea.

ENCYCLOPEDIA OF BUSINESS AND FINANCE

The history of information processing goes
back five thousand years to the abacus, one of the
earliest known counting devices. This first reported calculator or processor was developed in
ancient Egypt and in the Far East during the
thirteenth century. The abacus consisted of wires
strung across a rectangular frame. The frame divides each wire into two sections: The one on the
top contains two beads, and the one on the bottom contains five beads. Each top bead represents
the quantity 5; each bottom bead represents the
quantity 1. Each wire represents a place: units,
tens, hundreds, and so on. Computations were
done by moving the correct number of beads up
to the top of the frame.
The invention of logarithms by John Napier
was a landmark in the history of mathematics,
enabling people to multiply or divide large numbers quickly and accurately. As a product of logarithms, Napier invented a tool, nicknamed
‘‘Napier’s Bones,’’ that was used to multiply, divide, and extract square and cube roots.
In 1642 a French philosopher and mathematician, Blaise Pascal, invented the first adding
machine, called the Pascaline. It consisted of a
series of ten-toothed wheels connected to numbers that could be added together by advancing
the wheels by a correct number of teeth. The
Pascaline was used until it was replaced by the
electronic calculator in the 1960s.

In the 1820s, Sir Charles Babbage, an inventor and genius, developed a mechanical device
that could be programmed to perform simple
mathematical calculations. He called his invention the Difference Engine. In 1834, he designed
the Analytical Engine, which could do more
complicated calculations. It could multiply, divide, add, subtract, and even print out an answer.
It included an input device, a storage facility to
hold numbers for processing, a processor or
number calculator, a control unit to direct tasks
to be performed, and an output device. The concept used in the Analytical Engine is the concept
used in today’s general-purpose computer, which
is why Babbage is considered to be the father of
the modern computer and the field of study
known today as operational research.

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INFORMATION PROCESSING: AN HISTORICAL PERSPECTIVE

The Hollerith Tabulator was created at MIT in 1884.

In 1884, an American inventor at MIT, Herman Hollerith, filed his first patent for a system
of encoding data on cards through a series of
punched holes. His hand-fed press sensed the
holes in punched cards as a wire passed through
the holes into a cup of mercury beneath the card,
closing the electrical circuit. This process trig-

462

gered mechanical counters and sorter bins that
tabulated the appropriate data. The U.S. government used Hollerith’s machine to help with the
1890 census tabulation. His later machines mechanized the card-feeding process, added numbers,
and sorted cards, in addition to merely counting
data. In 1896, Hollerith started the Tabulating

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INFORMATION PROCESSING: AN HISTORICAL PERSPECTIVE

Herman Hollerith.

Machine Company, which was the predecessor of
the IBM (International Business Machines) Corporation.
Two major types of information-processing
equipment were developed at the end of the nineteenth century. Christopher Sholes developed the
first typewriter; it operated at a speed faster than
a person could write, and its letters were always
legible. Alexander Graham Bell, Charles Painter,
and Chickester Bell invented the first telephone,
which enhanced the processing of oral information.
Dr. John V. Atanasoff and Clifford Berry are
believed to have invented the first electronic digital computer during the period 1937-1942. Their
invention was called ABC, which stood for
Atanasoff-Berry Computer.
In 1945, Howard Aiken, a mathematician,
created the first digital computer, constructed
from mechanical adding machine parts. An instruction sequence was fed into the machine on a

ENCYCLOPEDIA OF BUSINESS AND FINANCE

roll of punched paper tape, rather than being
stored in the computer, to solve a problem.
A research team at the University of Pennsylvania under the leadership of Dr. John W.
Mauchly and J. Presper Eckert, Jr., was working
with the U.S. Army in 1945 on the ENIAC (Electrical Numerical Integrator and Calculator)
project. Their goal was to develop a calculating
device with memory that could set firing tables
for different weapons under varied conditions
with target accuracy. They refined the ABC by
developing five functional units—called central
control, central arithmetic, input, output, and
memory—to enhance these first electronic computers.
In 1946, John Presper Eckert and John
Mauchly introduced the first ‘‘true computer’’ by
unveiling the ENIAC I. It was an enormous machine covering 1800 square feet, weighing 60,000
pounds, and consuming 160 kilowatts of electrical power. This early machine had the calculating
power of today’s pocket calculator. With so many
vacuum tubes, one of them would burn out every
few minutes, which severely limited the running
time of a program. They started the EckertMauchly Computer Corporation, which was later
bought out by Remington Rand Corporation,
which changed the name to the UNIVAC division of Remington Rand.
The transistor, which was invented in the late
1940s, offered a huge advantage over vacuum
tubes for building computers. Improvements in
transistors led to the first integrated circuit, in
which a number of transistors and other electronic devices, together with the wiring that connects them, are manufactured in one piece. Development of this technology changed the future
of computers forever.

The next computer was UNIVAC I, built by
Remington Rand. It introduced the use of magnetic tape as a means of input into a computer.
The UNIVAC I was the first commercially available computer; the first one was installed at the
Census Bureau in 1951 and the second one was
installed at General Electric Appliance Park.
In the 1950s, when a computer was first used
for business and engineering applications, the

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INFORMATION PROCESSING: AN HISTORICAL PERSPECTIVE

term data processing was first used, defined as the
process of changing letters, numbers, and symbols into usable written information. The next
attempt at data processing was the development
of word-processing equipment to automate the
production stage of typing documents. These
machines produced high-quality documents efficiently but, unlike data-processing equipment,
did not have calculating capabilities.
Until 1956, the only commercial computer
was the UNIVAC I. IBM, recognizing the large
potential for commercial applications, developed
the IBM 650 computer system. Smaller than the
UNIVAC I, it became the most successful computer system in use during the 1950s.
The 1960s saw the introduction of secondgeneration computers that used transistor technology. The transistor performed the same duties
as the vacuum tube but was less expensive, required little power, and generated little heat.
Computers became smaller in size, lower in cost,
and quicker in operation when transistors replaced the vacuum tubes. Second-generation
computers replaced machine language with assembly language, allowing abbreviated programming codes to replace long, difficult binary codes.

Second-generation computers, however, had
limited compatibility and used low-level programming languages. More than five thousand
second-generation computers were installed in
the United States, with the most successful machine being the IBM 1401.
Integrated circuits replaced transistors in
third-generation computers. Integrated circuitry
utilized extremely small chips of silicon mounted
on a ceramic or glass substrate, segments of
which had been metalized to form an electronic
circuit similar to the transistor found on the
printed circuit board. Third-generation computers had increased internal processing speed, diskoriented systems, compatibility and multiprogramming capability, and data communications
with on-line systems.
Fourth-generation computers are characterized by a microprocessor contained on a single
silicon chip, called a semiconductor. These machines were smaller and more energy-efficient.

464

IBM’s System/360 computers gave customers a
choice of processors, power, speed, and memory.
Intel, the leading manufacturer of microprocessor chips, introduced the Pentium processor. The
microcomputer moved the computer into small
businesses and homes.
The history of information processing is vast
and filled with inventions. We have gone from an
abacus to a graphing calculator, from Babbage’s
Analytical Engine to powerful computers in the
home. We now have cell phones, faxes, and answering machines.
IBM, which entered the computer field in
1951, created the personal computer for business
and home use and rapidly advanced the field of

data processing. Its relatively low-cost desktop
microcomputer, with its enhanced graphics and
communications capabilities, gave birth to the
huge software industry that automated the processing of information.
By the 1980s, attention had focused on other
stages of the document cycle in which manual
tasks other than typing might be automated. The
term word/information processing was introduced
to describe automation as it is applied to all stages
of the document cycle.
In today’s fast-paced business world, information must be gathered, processed, and made
available at an ever-increasing speed. The computer has proven to be a fast, reliable, and economical means of processing information critical
to all organizations. Effectively managed information helps an organization serve its customers
better and operate more efficiently. Information
processing has given us the tools that can help us
to become more creative and productive in our
work while eliminating many of the boring, repetitive tasks of the workplace.
BIBLIOGRAPHY

‘‘Babbage’s Calculating Engines, The Charles Babbage Institute Reprint Series for the History of Computing.’’
(1982). www.cbi.umn.edu/charles.htm.
Bellis, Mary. (1998, 23 June). ‘‘Inventors of the Modern
Computer: The UNIVAC Computer.’’ inventors
.miningco.com/library/weekly/aa062398.htm.

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INFORMATION SYSTEMS

Bergerud, Marly, and Gonzalez, Jean. (1998). ‘‘A Calculating
Man.’’ US News and World Report August 17-24:
Bradbeer, Robin, DeBona, Peter, and Laurie, Peter. (1982).
The Beginner’s Guide to Computers.
Cashman, T., and Keys, W. (1980). Essentials of Information
Processing. New York: Harper Row.
‘‘Computers: History and Development.’’ www
.digitalcentury.com/encyclo/update/comp – hd.html.
Jennings, C. (1981). Information Processing. Stillwater, OK:
Mid-America Vocational Curriculum Consortion.
Limback, R. (1981). Introduction to Data Processing: Instructor’s Guide. Columbia: University of Missouri, Instructional Materials Laboratory.
Long, L. (1984). Introduction to Computers and Information
Processing., NJ: Prentice Hall.
Patton, Peter C. (1994). ‘‘ENIAC 1996: Celebrating the Birth
of Modern Computing.’’ PennPrintout 10(4) February:
Spencer, D. (1974). Introduction to Information Processing.
OH: Charles and Merrill Publishing Company.
‘‘System/360.’’ www.ibm.com/ibm/history.

JAMES E. MILES

INFORMATION SYSTEMS
The term information system refers to information technology that is used by people to accomplish a specified organizational or individual objective. The technology may be used in the
gathering, processing, storing, and/or dissemination of information, and the users are trained in
the use of that technology, as well as in the
procedures to be followed in doing so. The specific technologies that collectively comprise information technology are computer technology
and data communications technology. Computers
provide most of the storage and processing capabilities, while data communications—specifically
networks—provide the means for dissemination
and remote access of information.

Advances in computer hardware, software,
and networking technologies have spurred an
evolution in the structure, design, and use of corporate information systems.
COMPUTER HARDWARE

When computers first began moving into the
business world in the late 1950s and early 1960s,

ENCYCLOPEDIA OF BUSINESS AND FINANCE

the computing environment was best described
as centralized, host-based computing. In this environment, the typical organization had a large
mainframe computer (the centralized host) connected to a number of ‘‘dumb’’ terminals scattered throughout the organization or at remote
sites. These terminals were labeled ‘‘dumb’’ because they had no native ‘‘intelligence’’ (i.e., they
had no built-in central processing units [CPUs]
that were capable of processing data). The mainframe did all the data processing for all the user
terminals connected to it.
In the mid-1960s, Digital Equipment Corporation (DEC) announced the development of
the minicomputer. Smaller than the mainframe,
the minicomputer ushered in the era of
distributed data processing (DDP). In this new
processing environment, an organization could
connect one or more minicomputers to its
mainframe. Typically, the minicomputers were
located in an organization’s regional offices,
from which they were connected to the mainframe in corporate headquarters. Thus, the organization’s data-processing function was no
longer localized in a single, centralized computer (the mainframe) but, rather, distributed
among all the computers.
The commercial introduction of the personal
computer by IBM in the early 1980s revolutionized organizational data processing. The personal computer carried the distributed processing concept even further within organizations—

it brought data processing to the desktop. Also, it
eclipsed the dumb terminal as the terminal of
choice by users. The commercial success of the
IBM personal computer led other computer
manufacturers to develop their own personal
computers that were compatible with the IBM
PC (these are usually described as IBM clones or
IBM-compatible computers). One notable exception is Apple Computers, Inc., which developed
its own line of non-IBM-compatible computers,
namely the Apple and Macintosh line of computers. The all-inclusive term microcomputer is
sometimes used to encompass all makes and
models of desktop computers, including the IBM

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INFORMATION SYSTEMS

IBM personal computer.

PC (and its clones) and the Apple/Macintosh
computers.
It is important to note that, despite their
proliferation and ubiquity, personal computers
have not replaced minicomputers or mainframes.
A large number of organizations still rely on these
larger computers for significant aspects of their
day-to-day operations.

466

COMPUTER SOFTWARE

Computer software is the set of programs and
associated data that drive the computer hardware
to do the things that it does, such as performing
arithmetic calculations or generating and printing a report. Software typically comes in one of
two forms: custom-written application programs
or off-the-shelf software packages. Custom-written

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INFORMATION SYSTEMS

application programs are usually written by an
organization’s own programming team or by
professional contract programmers to satisfy
unique organizational requirements. Off-theshelf software packages are produced by software
development companies and made commercially
available to the public. They usually fall in one of
two main categories, namely system software or
application software. The former includes such
specialized programs as operating systems, compilers, utility programs, and device drivers. While
these programs are important—and necessary—
to the overall performance of an information
system (especially from the ‘‘machine’’ perspective), they are not the primary focus of corporate
information systems. Their basic functions are
more machine-oriented than human-oriented.
Application software is designed to more directly help human users in the performance of

their specific job responsibilities, such as business
decision making, inventory tracking, and customer record keeping. From a software perspective, this is what corporate information systems
are primarily concerned with.
One of the very important information systems functions is systems analysis and design, that
is, analyzing a client’s business situation (or
problem), with respect to information processing, and designing and implementing an appropriate—usually computerized—solution to the
problem. Information systems professionals who
specialize in this area are known as systems analysts. The process begins with a detailed determination of the client’s information requirements
and business processes. The solution frequently
involves some programming, as well as the use of
an appropriate application software package(s),
such as a database management system (DBMS)
for designing and implementing a database for
the client. It may also involve some networking
considerations, depending on the user’s requirements and goals. Some typical organizational information systems that can result from a systems
analysis and design effort include the following.
Transaction processing systems: These record
and track an organization’s transactions, such as
sales transactions or inventory items, from the

ENCYCLOPEDIA OF BUSINESS AND FINANCE

moment each is first created until it leaves the
system. This helps managers at the day-to-day
operational level keep track of daily transactions
as well as make decisions on when to place orders, make shipments, and so on.
Management information and reporting systems: These systems provide mid-level and senior
managers with periodic, often summarized, reports that help them assess performance (e.g., a
particular region’s sales performance in a given
time period) and make appropriate decisions

based on that information.
Decision support systems: These systems are
designed to help mid-level and senior managers
make those difficult decisions about which not
every relevant parameter is known. These decisions, referred to as semistructured decisions, are
characteristic of the types of decisions made at
the higher levels of management. A decision on
whether or not to introduce a particular (brandnew) product into an organization’s product line
is an example of a semistructured decision. Another example is the decision on whether or not
to open a branch in a foreign country. Some of
the parameters that go into the making of these
decisions are known. However, there are also
many unknown factors — hence the
‘‘semistructuredness’’ of these decisions. The
value of a decision support system (DSS) is in its
ability to permit ‘‘what-if’’ analyses (e.g., What if
interest rates rose by 2 percent? What if our main
competitor lowered its price by 5 percent? What
if import tariffs are imposed/increased in the
foreign country in which we do, or plan to do,
business?). That is, a DSS helps the user (decision
maker) to model and analyze different scenarios
in order to arrive at a final, reasonable decision,
based on the analysis. There are decision support
systems that help groups (as opposed to individuals) to make consensus-based decisions. These
are known as group decision support systems
(GDSS).
A type of decision support system that is
geared primarily toward high-level senior managers is the executive information system (EIS) or
executive support system (ESS). While this has the

capability to do very detailed analyses, just like a

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INFORMATION TECHNOLOGY

regular DSS, it is designed primarily to help executives keep track of a few selected items that are
critical to their day-to-day high-level decisions.
Examples of such items include performance
trends for selected product or customer groups,
interest rate yields, and the market performance
of major competitors.
Expert systems: An expert system is built by
modeling into the computer the thought processes and decision-making heuristics of a recognized expert in a particular field. Thus, this type
of information system is theoretically capable of
making decisions for a user, based on input received from the user. However, due to the complex and uncertain nature of most business decision environments, expert system technology has
traditionally been used in these environments
primarily like decision support systems—that is,
to help a human decision maker arrive at a reasonable decision, rather than to actually make the
decision for the user.
COMPUTER NETWORKS

Together with computer technology, data communications technology has had a very significant impact on organizational information processing. There have been tremendous increases in
the bandwidths (i.e., signal-carrying capacities)
of all data communications media, including
coaxial cables, fiber-optic cables, microwave
transmission, and satellite transmission. Wide
area networks (WANs) provide access to remote
computers and databases, thus enabling organizations to gain access to global markets, as well as

increase their information sources for decision
making purposes. The Internet in particular—
the worldwide network of computer networks—
has greatly facilitated this globalization phenomenon by making it possible to connect any computer to virtually any other computer in any part
of the world. Advances in networking technologies have also enabled organizations to connect
their in-house personal computers to form local
area networks (LANs). This greatly facilitates organizational communication and decision-making processes.

468

The combination of computer and networking technologies has also changed the way
basic work is done in many organizations. For
example, telecommuting and virtual offices are
commonplace in several organizations. Telecommuting refers to the practice of doing office
work from home (i.e., without physically being in
the office). The term ‘‘virtual office’’ acknowledges the fact that a person’s office does not
necessarily have to be a physical location. A person can do productive ‘‘office work’’ (including
the making of managerial decisions) on the go,
for example, at the airport while waiting for a
flight, on the airplane, or from a beach half-way
around the world. These practices are made possible through modem-equipped computers that
can access a remote computer (the office computer) via a data communications network.
An organization’s overall performance can
be greatly enhanced by strategically planning for,
and implementing, information systems that optimize the inherent benefits of information technology to the benefit of the organization. This
requires effective leadership and vision, as well as
knowledge of both information technology and
the organization’s (business) environment.
BIBLIOGRAPHY

Laudon, Kenneth C., and Laudon, Jane P. (1996).
Management Information Systems: Organization and
Technology, 4th ed. Upper Saddle River, NJ: PrenticeHall.
Oz, Effy. (1998). Management Information Systems. Cambridge, MA: Course Technology.
Parsons, June J., and Oja, Dan. (1998). Computer Concepts
—Comprehensive, 3rd ed. Cambridge, MA: Course
Technology.
Senn, James A. (1998). Information Technology in Business:
Principles, Practices, and Opportunities, 2nd ed. Upper
Saddle River, NJ: Prentice-Hall.

THEOPHILUS B. A. ADDO

INFORMATION TECHNOLOGY
Information technology, as defined by the Information Technology Association of America

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INFORMATION TECHNOLOGY

The first commercial computer was the UNIVAC I.

(ITAA), is ‘‘the study, design, development, implementation, support or management of computer-based information systems, particularly
software applications and computer hardware.’’
Encompassing the computer and information
systems industries, information technology is the
capability to electronically input, process, store,
output, transmit, and receive data and informa-

ENCYCLOPEDIA OF BUSINESS AND FINANCE

tion, including text, graphics, sound, and video,
as well as the ability to control machines of all
kinds electronically.
Information technology is comprised of
computers, networks, satellite communications,
robotics, videotext, cable television, electronic
mail (‘‘e-mail’’), electronic games, and automated office equipment. The information indus-

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INFORMATION TECHNOLOGY

try consists of all computer, communications,
and electronics-related organizations, including
hardware, software, and services. Completing
tasks using information technology results in
rapid processing and information mobility, as
well as improved reliability and integrity of processed information.
HISTORY OF INFORMATION TECHNOLOGY

The term ‘‘information technology’’ evolved in
the 1970s. Its basic concept, however, can be
traced to the World War II alliance of the military and industry in the development of electronics, computers, and information theory. After the
1940s, the military remained the major source of
research and development funding for the expansion of automation to replace manpower with
machine power.
Since the 1950s, four generations of computers have evolved. Each generation reflected a

change to hardware of decreased size but increased capabilities to control computer operations. The first generation used vacuum tubes,
the second used transistors, the third used integrated circuits, and the fourth used integrated
circuits on a single computer chip. Advances in
artificial intelligence that will minimize the need
for complex programming characterize the fifth
generation of computers, still in the experimental
stage.
The first commercial computer was the
UNIVAC I, developed by John Eckert and John
W. Mauchly in 1951. It was used by the Census
Bureau to predict the outcome of the 1952 presidential election. For the next twenty-five years,
mainframe computers were used in large corporations to do calculations and manipulate large
amounts of information stored in databases. Supercomputers were used in science and engineering, for designing aircraft and nuclear reactors,
and for predicting worldwide weather patterns.
Minicomputers came on to the scene in the early
1980s in small businesses, manufacturing plants,
and factories.
In 1975, the Massachusetts Institute of Technology developed microcomputers. In 1976,
Tandy Corporation’s first Radio Shack micro-

470

computer followed; the Apple microcomputer
was introduced in 1977. The market for microcomputers increased dramatically when IBM introduced the first personal computer in the fall of
1981. Because of dramatic improvements in
computer components and manufacturing, personal computers today do more than the largest
computers of the mid-1960s at about a thousandth of the cost.
Computers today are divided into four categories by size, cost, and processing ability. They
are supercomputer, mainframe, minicomputer,
and microcomputer, more commonly known as

a personal computer. Personal computer categories include desktop, network, laptop, and handheld.
INFORMATION TECHNOLOGY’S
ROLE TODAY

Every day, people use computers in new ways.
Computers are increasingly affordable; they continue to be more powerful as information-processing tools as well as easier to use.
Computers in Business One of the first and
largest applications of computers is keeping and
managing business and financial records. Most
large companies keep the employment records of
all their workers in large databases that are managed by computer programs. Similar programs
and databases are used in such business functions
as billing customers; tracking payments received
and payments to be made; and tracking supplies
needed and items produced, stored, shipped, and
sold. In fact, practically all the information companies need to do business involves the use of
computers and information technology.
On a smaller scale, many businesses have replaced cash registers with point-of-sale (POS)
terminals. These POS terminals not only print a
sales receipt for the customer but also send information to a computer database when each item is
sold to maintain an inventory of items on hand
and items to be ordered. Computers have also
become very important in modern factories.
Computer-controlled robots now do tasks that
are hot, heavy, or hazardous. Robots are also

ENCYCLOPEDIA OF BUSINESS AND FINANCE


INFORMATION TECHNOLOGY

used to do routine, repetitive tasks in which boredom or fatigue can lead to poor quality work.
Computers in Medicine Information technology plays an important role in medicine. For
example, a scanner takes a series of pictures of the
body by means of computerized axial tomography (CAT) or magnetic resonance imaging
(MRI). A computer then combines the pictures
to produce detailed three-dimensional images of
the body’s organs. In addition, the MRI produces
images that show changes in body chemistry and
blood flow.
Computers in Science and Engineering Using
supercomputers, meteorologists predict future
weather by using a combination of observations
of weather conditions from many sources, a
mathematical representation of the behavior of
the atmosphere, and geographic data.
Computer-aided design and computer-aided
manufacturing programs, often called CAD/
CAM, have led to improved products in many
fields, especially where designs tend to be very
detailed. Computer programs make it possible
for engineers to analyze designs of complex
structures such as power plants and space stations.
Integrated Information Systems With today’s
sophisticated hardware, software, and communications technologies, it is often difficult to classify
a system as belonging uniquely to one specific
application program. Organizations increasingly
are consolidating their information needs into a
single, integrated information system. One
example is SAP, a German software package that

runs on mainframe computers and provides an
enterprise-wide solution for information technologies. It is a powerful database that enables
companies to organize all their data into a single
database, then choose only the program modules
or tables they want. The freestanding modules are
customized to fit each customer’s needs.
SOFTWARE

Computer software consists of the programs, or
lists of instructions, that control the operation of

ENCYCLOPEDIA OF BUSINESS AND FINANCE

a computer. Application software can be used for
the following purposes:
●

As a productivity/business tool

●

To assist with graphics and multimedia projects

●

To support household activities, for personal
business, or for education

●

To facilitate communications

Productivity Software Productivity software
is designed to make people more effective and
efficient when performing daily activities. It includes applications such as word processing,
spreadsheets, databases, presentation graphics,
personal information management, graphics and
multimedia, communications, and other related
types of software. Word-processing software is
used to create documents such as letters, memos,
reports, mailing labels, and newsletters. This software is used to create attractive and professionallooking documents that are stored electronically,
allowing them to be retrieved and revised. The
software provides tools to correct spelling and
grammatical mistakes, permits copying and moving text without rekeying, and provides tools to
enhance the format of documents. Electronic
spreadsheet software is used in business environments to perform numeric calculations rapidly
and accurately. Data are keyed into rows and columns on a worksheet, and formulas and functions are used to make fast and accurate calculations. Spreadsheets are used for ‘‘what-if’’
analyses and for creating charts based on information in a worksheet. A database is a collection
of data organized in a manner that allows access,
retrieval, and use of that data. A database management system (DBMS) is used to create a computerized database; add, change, and delete data;
sort and retrieve data from the database; and
create forms and reports using the data in the
database. Presentation graphics software is used to
create presentations, which can include clip-art
images, pictures, video clips, and audio clips as
well as text. A personal information manager is a
software application that includes an appointment calendar, address book, and notepad to
help organize personal information such as ap-

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